CH10: Fiscal and Supply side policies Flashcards
Definition: Fiscal policy
The management of the economy using government spending (injections) and Tax (withdrawals)
How do governments GROW the economy using FISCAL POLICY?
Increase gov spending hence injecting more money into the economy
Reduce taxation, hence reducing withdraws from the economy
How do governments SLOW growth of the economy using FISCAL POLICY?
Reduce public spending
Increase taxation
Why is taxation used?
to raise funds for governments- money raised is known as the public finance
What are the 3 main purposes of taxation?
To allocate resources efficiently - intervening in market failure situations: funding merit goods eg. healthcare, discouraging demerit goods, and providing public services eg. education.
To distribute income more evenly, or to meet certain needs - eg. via social security payments such as unemployment pay
To manage the economy - by taking more to less money out of the circular flow
What is the difference between direct and indirect taxes?
Direct - tax on people’s/organisation’s earnings or increase in wealth.
Indirect - taxes which are imposed on one section of the economy (eg. companies), but it is intended that the burden of paying the tax will be borne by another section of the economy (individuals). eg. VAT
ie. tax placed on good and services rather than on income or profits.
What is Ad Valorem taxes?
eg. VAT, sales tax, where the tax is charged based on the value of the transaction/ % of the value of the product
Unit taxes
Expressed as a value in currency related to a specified QUANTITY of items sold or weight of an item eg. tax on a pack of cigarettes
Excise duties
tax levied on the sale or use of certain products eg. tobacco, alcohol, energy, mineral oils, vehicles. They can be charges as either an amount per quantity (UNIT TAX) or % of the value of the product (Ad Valorem)
Wealth taxes
Charged as a % of an individual’s wealth annually
Consumption taxes
Taxes on the purchase value of goods or services.
They can be SINGLE STAGE (levied only at one stage in the production/sales process)
or MULTISTAGE (levied every time the product is sold)
Property taxes
Levied on the sale or rent of property eg. stamp duty
What is the effect of PROGRESSIVE tax?
As income increases, the % paid in (progressive) tax increase. ie. high income earners pay more as a result vs. low income earners.
eg. income tax in UK
What is the effect of REGRESSIVE tax?
As income rises the % paid in (regressive) tax falls.
Low income earners pay more s a % of their earnings.
eg. VAT, sales tax
What is the effect of PROPORTIONAL tax?
As income rises the % pain in tax stays the same.
High and low income earners pay the same % of their income in tax.
Definition: Public sector net borrowing
The amount government borrows to cover the shortfall between taxation revenue and government spending
Definition: Fiscal deficit aka Budget deficit or an expansionary fiscal policy
government spending is GREATER than taxation revenue
Definition: Fiscal surplus aka budget surplus
Taxation revenue (public finance) is GREATER than government spending
Balanced budget
Taxation revenue = government spending
What are advantages to a Fiscal deficit?
Increased growth in the economy (boosting demand and growth)
What are disadvantages to a fiscal deficit?
Note. the public sector net borrowing would be higher when there is higher shortfall between tax revenue and government spending (ie. in the case of a fiscal deficit)
higher borrowings (by the government to finance the gov spending) could mean:
- Higher interest rates - the gov may need to pay higher interest rates to encourage people to lend to them. this may result in higher interest rates for everyone, making everyone with loans worse off.
- Higher interest payments - higher borrowing means there will be more interest for the government to pay in future hence there will be less to spend on services such as education, defence and healthcare etc.
Name the 2 types of budget deficit
Cyclical
Structural
What is a Cyclical budget deficit?
This is linked to the trade cycle.
A deficit often rises when the economy is on a downward trend, as governments spend more and taxation levels drop. NOT A HUGE PROBLEM as it will be offset by a surplus when the economy goes into the upward cycle.
What is a Structural budget deficit, and how does this arise?
arises from a more permanent imbalance in the budget and leads to an ever growing national debt.
can arise from:
Ageing population
Resistance to pay taxes
Resistance to reducing public expenditure
Development of the economy
Wage inflation- if wages rise public spending to healthcare and education professionals will also rise
When does a balanced budget occur?
- The gov does not want to grow or slow growth of the economy
- The gov is using monetary policy rather than fiscal to manage the economy
What are Gov spending supply-side policies?
spending on:
Education
Healthcare services
Infrastructure
What do examples of other supply side policies involve?
encouraging competition and investments
improving effectiveness of labour
What are policies to encourage competition?
Privatisation
Deregulation - allowing private sector to compete with state owned business
What is an advantage of supply side policies vs. Fiscal and Monetary?
Less likely to cause inflation and less likely to impact national debt (applies to fiscal policy)
